The one reveal of note in yesterday’s minutes was the plan coming together with how to proceed with QT. Just as the rate hike cycle has been extraordinarily gradual, QT will be as well but the end result will still be the same, a tighter monetary policy. Greenspan did something similar in the mid 2000’s as each successive meeting when he tightened the statement read: “the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.” Thus, the consequences of stricter policy was just a timing issue rather than a path to a smooth exit. The Fed and markets right now are believers that this time will be different and a painless exit can be pulled off by moving gradually which would lead to the so called ‘soft landing’. My readers know I tend to have a differing opinion. The flattening yield curve we know is also questioning the optimism.
I’ve stated many times that the AAII individual investor survey is not my preferred sentiment gauge because of its weekly EKG type volatility. The past few weeks just highlights this again. Two weeks ago, bulls clocked in at 32.7, fell 9 pts last week to 23.8 and rebounded 9.1 points today to 32.9. What does that tell us? The bear side was a bit more calm as it rose 4 pts last week only to fall 4 pts this week to 30. The Neutral, ‘I don’t know’ camp dominates for a 3rd straight week with a print of 37.1. The CNN Fear/Greed index happens to be neutral too. I mostly prefer the weekly Investors Intelligence index.
After a Q1 run of better global trade data, particularly out of Asia, Hong Kong reported a miss in its relative to expectations. Exports in April did rise 7.1% y/o/y but the estimate was up 12.5% and off an easy comparison. This comes also as China reported a string of economic data misses for the month of April. Exports to China did rise but slowed to 4.1% y/o/y from 16% in March. In case you missed it yesterday, Moody’s also downgraded Hong Kong’s credit rating and said “credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial and political linkages with the mainland.” Exports to the US fell. Notwithstanding the miss, highlighting the turn in Asian trade of late, in most of 2015 and well into 2016, Hong Kong exports fell 15 straight months in a row. Imports were higher by 7.3% y/o/y but that also badly missed the estimate of up 13.5% and the comparison it had last April was a 4.5% drop.
The economic news came after the Hang Seng closed with an .8% gain but the Hong Kong dollar is down for the 5th straight day. In contrast the yuan is trading sharply higher vs the US dollar and I can’t explain why. It’s all of a sudden at a 3 month high for onshore and a 2 month high for offshore but we know the US dollar is also trading poorly against many other currencies. Even the Canadian dollar which has traded weak against the US dollar for a while has gotten a recent bid as it stands at a one month high after the BoC statement yesterday was more hawkish than expected. The Shanghai comp completely shrugged the nothing new Moody’s downgrade with a 1.4% overnight rally but every time we see a move like that many speculate its due to state intervention. What a bad habit that is. Copper is down slightly. Oil is a sell on the OPEC news as the 9 month extension cut is confirmed.
The Bank of Korea left rates unchanged as expected at 1.25% and my favorite Asian stock market, the Kospi, closed at another record high and still stands at 10x 2017 earnings estimates.